Imperfect Markets versus Imperfect Regulation in U.S. Electricity Generation
This paper measures changes in electricity generation costs caused by the introduction of market mechanisms to determine output decisions in service areas that were previously using command-and-control-type operations. I use the staggered transition to markets from 1999- 2012 to evaluate the causal impact of liberalization using a nationwide panel of hourly data on electricity demand and unit-level costs, capacities, and output. To address the potentially confounding effects of unrelated fuel price changes, I use machine learning methods to predict the allocation of output to generating units in the absence of markets for counterfactual production patterns. I find that markets reduce production costs by $3B per year by reallocating output among existing power plants: Gains from trade across service areas increase by 20% based on a 10% increase in traded electricity, and costs from using uneconomical units fall 20% from a 10% reduction in their operation.
I am grateful to Gary Becker, Jim Bushnell, Thom Covert, Tatyana Deryugina, Edward Glaeser, Michael Greenstone, David Hémous, Lawrence Katz, Ryan Kellogg, Erin Mansur, Kevin Murphy, Erica Meyers, Morten Olsen, Jim Sallee, Andrei Shleifer, Chad Syverson, Roberton Williams III, Matthew White, and seminar participants at Harvard, MIT, Cornell, Chicago, Yale, the UC Energy Institute, the EEE Session of the 2015 NBER Summer Institute, UIUC, Wharton, and Brown for helpful comments and suggestions. Sébastien Phan, Julien, Sauvan, Songyuan Ding, Enrique Chazaro-Acosta, Xianying Fan, Mary Vansuch, and Dan Pechi provided excellent research assistance. This paper has been reviewed by the Energy Information Administration to ensure no confidential data has been disclosed. All errors remain my own. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
- Market mechanisms led to increased coordination across utilities and less output from high-cost generators, substantially reducing...